When is a Nonprofit Not a Nonprofit?

Last week’s blog led to a reader sending me a series of thoughtful questions (see comments).  The first question, however, generated a swift and blunt reply.

His question asked how I would classify a nonprofit organization “whose only revenue stream is governmental grants.  Are they a ‘non-profit’ or just a ‘quasi-government’ agency…?”  I love easy questions like this.  My answer?  I classify this as a “nonprofit flirting with death!”

Forget the debate on nomenclature and focus on the big picture:  long-term sustainability.  Any nonprofit that is funded through a single stream, as opposed to having as diversified an income strategy, is on shaky ground, to say the least.

I hear the Greek chorus in the background:  “Our only funding stream is government grants, and we are just fine.  We only get grants from multiple foundations and we are surviving.  Why are you scaring everyone?”  To which I respond:  “That is not a long-term, viable strategy!”

It is possible for a nonprofit to survive—which to me is not the same as “be sustainable” or, better yet, thrive–funded solely by grants from multiple foundations.  But at some point, foundation priorities may change and your mission is no longer within that new framework.  Then what?  Better to have a diversification of some foundations, some corporations, some government grants (if available), and a healthy dose of individuals.

Surviving just on government grants, however, is even trickier, given that much government money that funds nonprofits is generally trickled down from the tier above.  Thus, local government dollars are frequently tied to the health and well-being of the state which, in turn, is tied to the health and well-being of the feds.  So, while it looks like you’ve got multiple sources within the one stream of “government”, they are so intertwined, you don’t really.  Danger! Danger!

But to return to the reader’s question:  is this a nonprofit or a quasi-government agency?  Again, easy answer:  it is a nonprofit.  Even the American Red Cross, created through an act of Congress and which some think of as a quasi-government agency is, in the end, a nonprofit.  And as a nonprofit dependent upon government dollars, should an organization benchmark its employee compensation against nonprofits or the government?

I am just thrilled benchmarking is happening!  Seriously, though, compensation should be benchmarked against the market in which you compete for employees.  For some nonprofits, there may be no competition in government or the for-profit sector, while for others, their employees can seek jobs in any sector, their skills are in that much demand.  For example, a CFO needs the same skills and knowledge to be a CFO at a for-profit as a non-profit.  These days, a social worker or physical therapist can find work in a nonprofit or for-profit.  And while we all know mission is a huge draw—and psychic compensation–for those of us working in the nonprofit sector, the times in which we are living may force people to forsake mission for money.  So benchmark wisely and not according to what box is checked, so to speak.

His last questions raises the matter of to whom are we accountable.  I may have misread his question, but I read accountable and heard beholden.  We absolutely are accountable to our donors, and all of our other stakeholders—staff, volunteers, clients, public, etc.

In accounting to our donors, we must let them know that we have used their dollars as promised to achieve those specific results; but we never should be beholden to them, for then we run the risk of losing sight of our mission and raison d’etre.  What defines a nonprofit, in the eyes of the IRS, is that it is an organization that is working on behalf of some portion of the public good.  Working on behalf of the public makes nonprofits beholden to the public—not a donor, not a founder, not anyone.  They are beholden to do what is best for that part of the public it serves.  A successful nonprofit, therefore, should be best at determining what that portion of the public it serves needs and then finding a donor willing to support that endeavor.  It should not work the other way around, unless the idea the donor brings is one that is truly, truly needed and adds value to delivering on the mission.  A nonprofit that becomes beholden to a donor—be that donor the government, an individual or a foundation—and is doing the donor’s bidding and not serving the mission has lost its focus.

I invite you to weigh in on this – but be careful what you wish for because you’ll likely get my no- punches-pulled response.